Bye-bye bulls, hello bears

After almost a decade of being sourpusses, stock-market bears can roar about the Nasdaq's rocky year. Even Internet analysts have turned tail
Written by Larry Barrett, Contributor

After watching the Nasdaq lose more than half its value in the past eight months as dot-com after dot-com went belly-up, several Internet analysts strategically traded in their horns for claws heading into 2001. Get used to it -- bearish is in.

As one analyst put it: "The greatest amount of wealth was created and destroyed in 2000 than during any other period in the market's history."

Don't blame the analysts (even if they were partly responsible for the insane valuations given to the likes of Priceline.com, Engage, Amazon.com and even Pets.com) for adapting to today's market conditions and changing their tune.

Many of these one-time Net bulls would have loved to maintain their aggressive outlook on the sector, but a weak online advertising market and slowing economy have forced them to be realistic. Internet time didn't replace the time it takes to build a business, just the time it took to get funding. That fact has made Internet analysts more sober this time around.

This attitude change is a good thing, if not terribly useful to investors in the wake of the dot-com crash.

"The Internet bubble burst in 2000, bringing a permanent end to the days of Internet euphoria," said Fred Moran, an Internet analyst at Jefferies & Company. "It's been a devastatingly bearish marketplace since late March and there are no signs of improvement anytime soon."

Moran, Holly Becker of Lehman Brothers and Henry Blodget of Merrill Lynch, have actually turned sour on some of the stocks that made them stars just one year ago.

EBay, Amazon.com and even Yahoo! are no longer given a free pass by the analyst community despite their undisputed status as leaders in their respective sectors.

In recent weeks, Yahoo! has absorbed several downgrades as analysts fret about advertising spending and its inability to improve margins with traditional advertisers.

While Amazon.com still shows some signs of moving toward profitability, it still remains a question mark at around $20 a share -- a ridiculous amount considering this stock was well over $100 a share a year ago and above $300 and $400 a share before that.

Clearly the Internet's explosion on Wall Street was more a reflection of its potential and the potential of some key companies rather than any fundamental-based valuation.

In years past, the market took a similar stance on hot biotech issues, cellular phone companies back in the 1980s and even the multitude of PC makers that shrunk to five or six major players overnight.

"We've seen many cycles like this where companies received a huge valuation based on their potential," Moran said. "But nothing like this. When it comes to projections and execution, most of these Net companies have come up short."

Moran said the cult-like following that stocks such as Yahoo! and America Online enjoyed during the run-up is the same group that's driving the stocks into the ground.

"There's going to be some bullishness in the future, but it will be highly selective," he said. "Investors and analysts should always look at the prospects of individual stocks rather the potential for an entire group or sector."

CIBC World Markets' John Corcoran said there are still some bulls out there, but "they aren't the cheerleaders doing back flips on the sidelines."

"There's a little segment of the Internet space that's actually quite interesting to us now," he said. "But on the whole, these companies are learning to survive in a new and much more difficult world."

Corcoran says that while analysts deserve their fair share of blame, management at some of the shakier Internet firms made a bad situation worse.

"The market can't carry idiotic companies with B-minus management and a D-minus business models like it did a year or two ago," he said. "Those days are over."

As if this combustible combination of sky-high valuations and marginal business models wasn't dangerous enough, investors in recent years have taken to the PC to do their own trading.

Just one year ago, online trading was at its apex as the informed and the less-than-informed raked in huge gains from day trading. It was all so easy.

"Here we are in December and lots of people have lost lots of money this year," Corcoran said. "Retail investors and fund managers have lost a staggering amount of money."

If there's any good to be found in all of this, it's that investors and analysts are both reevaluating how they value Internet stocks moving forward.

"I'll tell you as an analyst I had to take a hard look at what I was doing and how I was analyzing companies and industries after all this," said Chris Hansen, an analyst at Banc of America Securities. "We have to question the methods we use to value companies and be quicker to adapt to new developments within the sectors we cover."

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